Category Archives: Innovation

Many of the music industry’s biggest stars gathered today for a unique press conference to promote Tidal, a new hi-fidelity streaming music service. On stage, an ensemble cast of promoters — Jay-Z, Beyonce, Jack White, Kanye West, Rihanna, Alicia Keys, Daft Punk, Coldplay’s Chris Martin — declared their intent to revolutionize the music industry. The key here is that Tidal is “artist-owned” and controlled, as compared to studio-managed.ray ban kids sunglasses
Artists have long been critical of freemium streaming services, like Pandora, Grooveshark, or Spotify. Tidal, on the other hand, has no free option, but rather a two-tier pricing option: $10/month for regular streaming and $20/month for hi-fidelity streaming. Its co-owners (the stars listed above), proclaim that this will help return music back to the artists.ray ban junior sunglassesAs I argued when Taylor Swift launched her tirade against “free music,” the problem with our current system — for both consumer and average artist alike — is the publisher-centric model of copyright. Publishers benefit largely at the expense of consumers and the average artist. Hence, there are reasons to believe that this new service could be a welcome innovation. However, I specifically mention that copyright hurts the average artist, as, in addition to publishers, copyright’s prime winners are the superstar artists — the very ones who are launching this new service.

Thus, while I applaud a move to reduce studios’ rent-seeking capacity, I am skeptical about the effect this service alleges to cause. Without systematically changing the structure of the copyright system, we risk this firm simply becoming its own rent-seeking studio. Thus, the question of Tidal’s marginal benefit is twofold: whether it will improve the status quo of accessing existing works, and whether it will increase innovation.ray ban sunglasses polarized
If Tidal only ends up being a “big boys (and girls) club” for the superstars (so far, the only artists appearing on it are in Jay-Z’s inner circle), it will simply be a new $20/month toll. Should all of the major artists pull a Taylor Swift and eject from the free streaming services to exclusively list on Tidal, then this certainly is a loss for consumers and a transfer to the elite artists. It will be much less an artists’ revolution in the music industry than the artist elite forming their own rent-seeking studio. Meet the new boss, same as the old boss.

One is also reminded of Neil Young’s recent flop with the “revolutionary” crowdfunded Pono service. Young’s service turned out to be pure snake oil not worth the cost — I wonder if Tidal consulted him on its own potential coup.ray ban white sunglasses
Among artists, copyright primarily benefits only those 1% superstars that made it big. Smaller acts are probably harmed by copyright on net. Everyone involved in the copyrighted entertainment business, from consumer to artist to publisher, has to put up with higher transactions costs arising from the need to search for existing copyright holders, negotiate with them, and license their own work downstream in a tangle of red tape. However, those that have the most socially valuable (highest grossing) works can justify the cost of copyright because it helps them minimize their losses from piracy.

This is for two reasons: First, people primarily want to pirate the biggest stars. On average, consumers would rather illegally download Interstellar and Beyoncé than Final Destination 12 and your friend’s cousin’s high school cover band.* Second, those big stars have greater bargaining power with their publishers. Established musical artists with immense clout can demand higher advances and royalty rates from their record labels. These are precisely the people seen on the stage for Tidal.

Now, if there was evidence that this increase in price would stimulate greater innovation in the field, this might be justified on efficiency grounds. There is a well-noted tradeoff between innovation and access: ceterus paribus, the more you increase copyright, the less access there is to existing works, complements of added monopoly power, but it makes acquiring copyrights more profitable and hence gives a greater incentive for artists to produce new works. There are certainly diminishing returns at the extremes, particularly in a 100% copyright world, which becomes a pure tragedy of the anti-commons. The effects of a 0% copyright world are still up for debate.

If new independent or unknown artists support Tidal and begin to use it, then the new service might justify the added cost to users. These lesser known artists, however, are more likely to support piracy and streaming as free advertising to help them churn out the real money made by (non-superstar) artists — merchandising and concert revenues. Thus, unless they find that Tidal gives them a bigger boost relative to other methods, odds are this system will not stimulate much musical innovation. Should that be the case, then it seems like this move is just to raise rents for existing copyright holders, rather than stimulate a new music revolution.nike air jordan 12
Let’s not also forget the obvious fact that raising the price for music services makes piracy all that more attractive to many consumers, should popular bands emigrate exclusively to Tidal. It was arguably Spotify and co.’s freemium model that dissuaded many would-be pirates in the first place such that nobody really talks about song piracy anymore (it’s video these days).

– – – – – – –air jordan release date
* The modern age of Bittorrent, however, provides a potential caveat. One could argue that people who have diverse interests might be more likely to illegally download movies and songs that aren’t superstars to save money. Consider “I don’t want to waste my time at the movie theater to see that crappy horror flick X, I’ll just download it; but the new action [franchise] blockbuster movie in 3D, that’s something we have to go see!”

nike air jordan fusion
This is another post on public goods inspired in part by Santiago’s previous post on the under provision of entrepreneurship as a public good argument. I admit that this post does not fully respond to the precise argument, as that would require a more fundamental critique of equilibrium analysis (hence, a potential future third post on this), but it’s still necessary to flesh out a more robust view of public goods.New Zealand ray ban sunglasses
Here, I want to focus on another aspect of public goods theory, as applied to a particular type of “good” – information. This is equally applicable to things that would today be patented (inventions) or copyrighted (creative expressions) under intellectual property laws, my research area, but also to information itself, as is disseminated via the price system.

In many ways, information is the purest (only?) public good. If we apply Samuelson’s (1954) typical public goods analysis, we find that once information is produced, it is instantaneously available for everyone to use simultaneously (non rivalry) and it’s damn near impossible to contain the spread of information to prevent others from using it (non excludability).ray ban eye glasses
Now, to be complete, both the inputs to producing information (the research and development expenditure, the erection of a specific complementary capital structure), and oftentimes, the products that result from produced information (physical products born of invention, CDs, DVDs) are excludable, if not also rivalrous. There are complications, but it’s largely the information itself that is the “messy” part of the economic analysis. Thus, following traditional public goods/welfare economics theory, the market will under-provide information (and inventions and creative expressions, etc).nike air max cb 94
Naturally, any of us at this blog and many of our colleagues, friends, and readers would turn to public choice (sure government could try to correct this under-provision, but is the benefit not outweighed by the cost and risk of the system being abused/captured/used for rent-seeking?) or market process analyses (how such interventions would distort the price system’s ability to disseminate distributed knowledge by affecting entrepreneurship). For the first, you could look at Boldrin & Levine’s masterwork, for the second, might I humbly suggest my forthcoming article.nike air jordan retro 3
However, I want to see if we might address the common argument with a neoclassical framework before resorting to these other (valid and complementary) perspectives. As I argued previously, the traditional theory is exogenous, where the conclusion of under provision logically follows from the way we define goods as inherently possessing particular qualities. Likewise, in this case, producing information supposedly exhibits a free rider problem because the non rivalry and non-excludability prevents the producer (discoverer/inventor/artist) from capturing the full social value of their information, as it is largely dissipated away amongst the rest of society (including rival producers).

Yet, as Richard Wagner (2012, 2013) argues, the free rider problem is not inherent in the provision of the good itself, but is an “artifact of particular institutional assumptions.” The true problem is that there is some inalienability of ownership over the good, which is often the result of some institutional failure, often in the public realm.

In the traditional view of information, there seem to be a number of implicit assumptions that are unwarranted and must be jettisoned. The usual story seems to assume two things (in addition to non-rivalry & non-excludability):

1. Once an idea is discovered, it is instantly and costlessly broadcasted anonymously to everyone

This statement has a lot of moving parts to it that need to be dissected. First, ideas are rarely broadcasted like a TV-show over the air out of NBC to all who have a (legal or illegal) receiver. Furthermore, those ideas that are broadcasted do not reach everyone. Take blogs for example, the paramount form of hailed modern citizen-journalism, open to all who have internet access (assuming it is not passworded or private). Most blogs will ultimately be accessed by a select group of people.Get ray ban sunglasses
This leads to the second point, that only some interested minority will receive any given idea. Tune into C-Span at any random time during the day. This is the Samuelsonian ideal type: a speaker is literally broadcasting ideas to everyone watching. But notice how many empty seats there are in Congress, not to mention the millions of Americans (I venture to say 99%) who chose not to watch C-Span, even if they were somehow all made aware of the schedule of speakers and topics.

Third, ideas are rarely anonymously spawned and disseminated. One can think of “memes” on the internet. Few people know who started the “Doge” meme (though Know Your Meme is doing the Lord’s work trying to find out). It obviously passed through a network of people commenting and sharing jokes on places like Reddit, which got out to 9Gag, and Facebook, and finally even U.S. Senators start using it (when you know it’s time to abandon ship). Though, in principle, anyone with internet access could potentially discover it, it is not until it flows through channels of social networks that it becomes “a thing” and is copied, remixed, and parodied.

Finally, ideas are not disseminated costlessly. Perhaps this is not a large effect, and there are plenty of cases where they could be diffused at negligible cost, say if J.K. Rowling stood on a soapbox in Trafalgar Square and shouted out the text of Harry Potter to passersby. But there still needs to be strong investments to generate hype and advertising. Imagine how much harder it would be for her, further, if she did this before anyone had heard of Harry Potter. The most obvious example of this effect for us is our capacity as educators. The failures of us economists to inform and teach the public about economics, despite our massive investments in teaching capital makes this plainly obvious. Any of us will tell you that getting our students interested and having them actually absorb and learn the information is not easy or costless.

We also have to worry about potential distortion from transmission. This is the classic “telephone game” dilemma we all played in elementary school: – in sending a complex message across many people, the message gets distorted, misremembered, ad libbed, or even (from the joksters) intentionally altered for comedic effect. Take a look at news reporting of major events and scandals. Often the news media (whether intentionally for ratings or genuine mistakes) focuses on some sound clip or particular aspect of a message and distorts it. The missteps of the news media and social media in identifying the 2013 Bostonbombing suspect are instructive here. Even in the internet world of costless CTRL-C CTRL-V, there are problems.

2. Once aware of the idea, all people value it highly enough to costlessly consume it

I already mentioned that not all people are going to value the information highly enough to use it (let alone highly enough to find it profitable to use when its use comes with a significant cost). Even once information is spread to another person, it is not costless to consume and utilize it. Suppose Apple plans to produce a new i-Hologram which creates an internet-connected personalized avatar of yourself in 3-D space. It’s going to revolutionize the market and everyone will want one. That sounds like a nice profitable idea, let’s get in on that, you say. Well how would you go about doing that? Even if you got your hands on one legally before it hit the market, you would have to reverse engineer it. That’s not to say it can’t be done, even done easily, since this clearly happens in the real world. But it is not costless.

Sweden air jordan
Once information is reverse-engineered and replicable, it still has to be produced, which requires high investments in a complementary structure of capital with specific uses directed at producing that new product. Again, these costs are not always prohibitive. If Merck reverse-engineers the formula for Phizer’s secret new diet pill, they probably have the machinery and the human capital to replicate it soon enough. But again, it is not costless. And Merck will still be the first-mover in the industry. While they will not be able to capture all of the potential profits of their new diet pill (because of Merck and generic knockoffs), they still may capture enough to make the pill profitable and worth producing for the public.

And to return to the Apple example for a moment. Even if your startup company is able to copy and produce the new hologram device and cut into Apple’s profits, many people will still want to buy Apple’s polished product with an established brand and reputation. Who the hell are you?

Lastly, one reason that discovering and using ideas is not costless is precisely because firms recognize the possibility of lost profits from reverse-engineering and have made contingency plans. To say nothing of patents or copyrights, firms use contracting devices such as non-compete clauses and non-disclosure agreements, and make other attempts to keep their discoveries from spilling out by keeping trade secrets.

In the end, relaxing these assumptions and including a number of types of information and transaction costs can lead to a more robust understanding of public goods problems and information. These also give rise to a number of institutional forms which manage these issues to overcome the free rider problem. Ultimately, our view will not be complete until we address these institutions, as Wagner puts it best through example (2013, 13-14):

Suppose, for instance, that a mayor forms the idea of hosting an open-air music and arts festival under the presumption that residents of the city would value that festival sufficiently highly to make the event worthwhile. Institutionally, how might the mayor go about doing this? Within the spirit of anonymity and free riding, the mayor might install collection boxes in private places and ask residents to make donations. How much or how little a person donates would be known only to that person…

Yet no sensible mayor would operate in such a fashion. The mayor would enlist allies who were of a similar mind about the festival, and these people would in turn establish an architectural pattern of participation that would be far removed from anonymity. That architecture could entail cellular patterns of discussion and contribution where friends ask friends for contributions. It could also entail publicity regarding the identity of contributors, perhaps even ranking them by contribution. In these and numerous other possible ways free riding would be obviated. In any event, an entrepreneurial mayor would never elicit anonymous donations. Instead, sponsors might be solicited, with those sponsors given various forms of publicity. While the festival might be open to all, there could also be places where seating was reserved for patrons who made significant contributions to support the festival. We would also expect to find that those who made larger contributions were those who valued the festival and the associated activities more highly. Under an entrepreneurial institutional arrangement, organization of the festival is possible according to the benefit principle, and the free-riding problem is avoided. Whether the resulting pattern would correspond to some presumptions of postulated equilibrium is impossible to determine because those postulated conditions are just theoretical constructions that do not have existence independently of the relevant process of social organization.

Ireland air jordan
A lot of people who are fans of free markets and technological innovation praise Uber as the poster child of market competition and ending crony monopolies like taxis. The ridesharing service promotes greater resource utilization and echoing the work of Hernando de Soto, brings a lot of dead capital to life, enabling low-income groups to become entrepreneurs in a world where regulation keeps them out. Even the Republican Party is trying to exploit the disruptive dynamism of Uber to claim themselves as “the party of Uber” (even if Uber has been saying things contrary to the GOP’s ideals). Contrast this to a lot of progressives who have madeUbertheirrallyingcall against unregulated markets. And yet, even economists widely agree (an unfortunate rarity), that on net, Uber is an improvement in people’s lives, for the obvious reasons.nike air max Coupon
I have used Uber about a dozen or so times, and have never had anything short of a wonderful experience. The drivers were always courteous, and many times we have had conversations about Uber, the taxi-monopoly, and the state of technological improvement. It might be where I currently live, but these drivers were ethnically diverse, often second-generation immigrants from North Africa and the Middle East, and some commented about how Uber was substantially improving their even friends and family’s lives back in their home countries. I have even thought, on multiple occasions, of driving for Uber.ray ban mirrored sunglasses
Yet, even as the taxi monopoly is obviously trying to bring Uber down, in a some ways, Uber itself is bringing itself down. Or, at least, it is smearing the ideal that we really want it to be. It’s CEO has been saying a lot of shady things, prompting the media to say Uber has an “a-hole problem.” Uber has been dealing with a lot of criticism over the way it has been engaging with its rivals such as Lyft and Sidecar. It seems Uber allegedly uses a lot of shady tactics to make it more expensive for Lyft. Maybe these claims are overblown or even misrepresented, in hopes to benefit Uber’s rivals.custom oakley sunglasses
None of this is to mention the cries of “price gouging” when Uber multiplies its rates during peak hours, and media attention given to horror stories of short trips with high bills. A friend of mine took an Uber on Halloween night about 10 miles for $250. While as a consumer in that situation I too might be irate, the greater principle of peak-load pricing is perfectly fine by me, it’s even socially beneficial. High prices signal information about relative scarcity, and induce new drivers to start offering their services. While you might save money by taking a cab in those situations, the “cost” you incur will instead be the hours waiting for that cab (if you can get one at all). And then there is the kicker, you can always chose not to take the Uber.nike air max 95 360
But the most troubling developments about Uber is that it is starting to play the Taxi monopoly’s own game against its rival ride-sharing companies:

In September, though, the company hired former Barack Obama adviser David Plouffe specifically to work with local governments. “Uber should be regulated,” says Plouffe, who hails the legislation he hammered out in Washington, D.C. as “groundbreaking legislation [that] provides a model going forward.”nike air jordan release dates
That model is one that gives clear advantages to Uber, which has more market share and political clout than its rivals such as Lyft and Sidecar. What the legislation does is establish “burdensome new ridesharing regulations” dictating minimum ages of drivers and other requirements that will make it more difficult for competitors to catch up to Uber or enter new markets in the first place. (Time)

In the end, we must remember that Uber is a business, and the goal of every business is to become a monopoly. The reason Uber has been such a force for good is that it opened up the stagnant monopoly of the taxi cabs to one of convenience and innovation precisely because it stood as a rival competitor. The taxis were able to crush competitors because of the favorable regulation that they were able to co-opt from regulators.

Uber broke this very stable equilibrium because it was able to exploit technological progress in software to come up with a clever way to offer a more convenient service to consumers, and an equally clever way around the pro-taxi regulations: it’s not a taxi service, it’s just a software app that connects people who want to share rides that happens to be in exchange for money, and you cannot hail one from the street.womens oakley sunglasses
But now that Uber has taken prominence over its own competitors, we should not at all be surprised that it would seek to use regulation to favor itself and make its rivals less competitive. Given favorable (but highly unlikely) circumstances, they would become the new taxi monopoly and we would be stuck back at square one. The only way to ensure consumer satisfaction and innovation is by the threat of rivalrous competition. Norway Oakley sunglasses
Thus, as economists and advocates of free markets, we must remember to be vigilant of the abuses of individual businesses — we are pro-market, not pro-business. Only through open competition can we enable the wealth-creation that allows us to live the good life. Even the most innovative company will use free-market rhetoric just long enough to allow them to capture enough market share to start turning to the political process to switch from earning profits by creating value for consumers to collecting rents and deterring entrants.Best Price air jordan
This is in no way a call to smear or boycott or prohibit Uber or ridesharing. We just have to realize that without reforming the capturable regulation itself, we risk our heroes becoming the villains once they are strong enough.